{"id":79257,"date":"2015-10-07T09:47:39","date_gmt":"2015-10-07T13:47:39","guid":{"rendered":"http:\/\/countingpips.com\/?p=79257"},"modified":"2015-10-07T07:16:24","modified_gmt":"2015-10-07T11:16:24","slug":"junk-bonds-still-not-priced-richly-enough","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/10\/junk-bonds-still-not-priced-richly-enough\/","title":{"rendered":"Junk Bonds Still Not Priced Richly Enough"},"content":{"rendered":"
October 7, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Junk<\/p>\n

By Martin Hutchinson<\/a>, Global Markets Analyst<\/em><\/p>\n

Income-seeking investors are often tempted by junk bonds<\/a> \u2013 especially if they use a broker who actively markets them.<\/p>\n

With prices down this year \u2013 the Barclays U.S. Corporate High-Yield Index is down 2.7% for 2015 \u2013 it may look like time to step into this pool.<\/p>\n

Unfortunately, the risk-reward dynamic is strongly biased against the retail investor.<\/p>\n

Plus, with recession looking increasingly likely, the \u201crisk\u201d part of the equation should steer us away from the junk bond market.<\/p>

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Unusual Circumstances<\/h2>\n

In 2008, the Barclays High-Yield Bond Index fell 25% \u2013 but it still beat the S&P 500, which fell 37%. Then, the bond index rebounded nicely in 2009, moving up 13%. Of course, that was only half as much as the S&P 500\u2019s 26% rebound.<\/p>\n

It\u2019s important to note, however, that 2008-09 isn\u2019t representative of junk bond performance during most recessions.<\/p>\n\n\n\n
Editor\u2019s Note:<\/strong> Speaking of the 2008 financial crisis, our own Alan Gula was working deep inside Wall Street at the time \u2013 and what he saw will stun you. It indicated that a second, much larger financial crisis was inevitable. The coming crash could devastate millions of Americans. Find out how to protect your wealth now<\/a>.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

In 2008-09, the Fed pursued a policy of ultra-low interest rates, and the federal funds rate was pushed to zero by the end of 2008. It has remained there ever since. Consequently, that recession didn\u2019t take a wholly meaningful toll on leveraged buyout deals and over-leveraged companies subjected to junk bond issuance.<\/p>\n

But in the next recession, the Fed\u2019s preferred solution \u2013 dropping interest rates to prevent shoddy deals from falling apart \u2013 won\u2019t be available.<\/p>\n

Indeed, the Fed will have no tools to prevent gimcrack, junk bond-financed deals from falling apart. That means the risks in the junk bond market are greater than they seem and greater than they were last time around.<\/p>\n

It\u2019s not as if junk bonds have been that brilliant of an investment in the last half decade, anyway. The SPDR Barclays High-Yield Bond ETF <\/strong>(JNK<\/a>), an indexed fund that\u2019s a reasonable proxy for the junk bond space, has returned 4.71% annually since October 2010.<\/p>\n

That\u2019s better than Treasury yields and better than inflation, but it\u2019s nothing like the 13.3% annual return from the S&P 500 Index.<\/p>\n

Risky Business<\/h2>\n

When Mike Milken created the modern junk bond market in the late 1970s and early 1980s, he used a presentation that showed investors that risk-adjusted returns on high-yield bonds were better than any other asset class.<\/p>\n

The problem, of course, was that Milken\u2019s observation of the junk bond market\u2019s returns \u2013 and his energetic promotion of junk bond deals \u2013 irrevocably changed the market in which junk bonds had provided such superior returns.<\/p>\n

Today, the fees available to junk bond promoters and companies leveraged through junk bonds are so huge that it\u2019s worth their using high-pressure sales techniques to sell the bonds. Meanwhile, prices for companies are bid up into the stratosphere, making the bonds progressively junkier.<\/p>\n

Finally, zero interest rate policy has sent asset prices skyrocketing and provided speculators with oodles of leveraged cash. Basically, the process has reached an extreme.<\/p>\n

Just look at the recent proliferation of \u201ccov-lite\u201d deals. Though they offer no protection for bondholders, they were immensely popular at the top of the 2006-07 credit bubble, and they\u2019ve reappeared in large numbers over the last three years.<\/p>\n

A period of continuously declining interest rates, such as we\u2019ve had since the 1980s, is exceptionally favorable for returns in the junk bond market because, generally, bond prices rise and leveraged companies do better than their projections when debt costs decline.<\/p>\n

Today, though, the risks are larger and the likely returns lower than they\u2019ve ever been.<\/p>\n

Individual investors are the \u201cgreater fool\u201d that Wall Street\u2019s high-pressure junk bond salesmen are currently targeting.<\/p>\n

Be smart and avoid the market.<\/p>\n

Good investing,<\/p>\n

Martin Hutchinson<\/p>\n

The post Junk Bonds Still Not Priced Richly Enough<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Martin Hutchinson, Global Markets Analyst Income-seeking investors are often tempted by junk bonds \u2013 especially if they use a broker who actively markets them. With prices down this year \u2013 the Barclays U.S. Corporate High-Yield Index is down 2.7% for 2015 \u2013 it may look like time to step into this pool. […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-79257","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79257","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=79257"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79257\/revisions"}],"predecessor-version":[{"id":79278,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79257\/revisions\/79278"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=79257"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=79257"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=79257"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}